2010 (1) TMI 11 - SC - Income Tax

Re-assessment - omission or failure on the part of an assessee to make a return under section 139 for any assessment year to the Income-tax Officer or to disclose fully and truly all material facts - in consequence of information in possession of AO reason to believe that income chargeable to tax has escaped assessment - Tax Laws (Amendment) Act 1987 - held that - post-1st April 1989 power to re-open is much wider. However one needs to give a schematic interpretation to the words reason to believe failing which we are afraid Section 147 would give arbitrary powers to the Assessing Officer to re-open assessments on the basis of mere change of opinion which cannot be per se reason to re-open - The Assessing Officer has no power to review; he has the power to re-assess. But re-assessment has to be based on fulfillment of certain pre-condition and if the concept of change of opinion is removed as contended on behalf of the Department then, in the garb of re-opening the assessment review would take place - to reopen an assessment tangible material should be there.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal question considered by the Court was whether the concept of "change of opinion" as a ground for reopening an income tax assessment stands obliterated with effect from 1st April 1989, following the substitution of Section 147 of the Income Tax Act, 1961 by the Direct Tax Laws (Amendment) Act, 1987. Specifically, the Court examined:

• Whether the amended Section 147 post-1st April 1989 confers wider powers on the Assessing Officer to reopen assessments without restriction to the previous conditions of omission or failure to disclose material facts.
• Whether the phrase "reason to believe" in Section 147 continues to operate as a safeguard against arbitrary reassessment based on mere change of opinion.
• The distinction between the power to review and the power to reassess, and whether the Assessing Officer's power to reassess has been improperly conflated with a power to review.

2. ISSUE-WISE DETAILED ANALYSIS

Issue: Effect of Amendments to Section 147 on the Concept of "Change of Opinion"

Relevant legal framework and precedents: Section 147 of the Income Tax Act, 1961, prior to the Direct Tax Laws (Amendment) Act, 1987, permitted reopening of assessments only if the Assessing Officer had reason to believe that income chargeable to tax had escaped assessment due to omission or failure to make a return or to disclose fully and truly all material facts (Section 147(a)), or if the Assessing Officer had reason to believe on information in his possession that income had escaped assessment even without such omission (Section 147(b)). This dual condition limited reassessment to cases with tangible cause.

Post the 1987 amendment but prior to 1st April 1989, Section 147 was substituted to empower the Assessing Officer to reassess if, for reasons recorded in writing, he was of the opinion that income had escaped assessment, removing the earlier dual conditions. However, this amendment was short-lived.

After the Direct Tax Laws (Amendment) Act, 1989, Section 147 was again amended to reintroduce the phrase "reason to believe" instead of "opinion", thereby reverting to a more objective standard for reopening assessments.

Court's interpretation and reasoning: The Court noted that the 1987 amendment initially broadened the Assessing Officer's power to reopen assessments based on his "opinion", which could lead to arbitrary use of power and effectively permit reassessment on mere "change of opinion". Recognizing this risk, Parliament reinstated the phrase "reason to believe" in 1989 to ensure that reopening assessments must be founded on tangible material and objective reasons, not just subjective opinion.

The Court emphasized that the power to reassess is distinct from the power to review. While review involves reconsideration of the same material and decision, reassessment requires a pre-condition - the existence of tangible material indicating income has escaped assessment. The concept of "change of opinion" cannot be a valid ground for reopening; otherwise, the Assessing Officer would be exercising a review power under the guise of reassessment, which is impermissible.

Key evidence and findings: The Court referred to the textual changes in Section 147 before and after the amendments, highlighting the legislative intent behind the reintroduction of "reason to believe". It also relied on Circular No. 549 dated 31st October 1989, which explained that the substitution of "opinion" for "reason to believe" was objected to by companies and stakeholders for potentially vesting arbitrary powers in the Assessing Officer. The Circular clarified that Parliament reintroduced "reason to believe" to allay such fears, thereby confirming the necessity of tangible reasons for reassessment.

Application of law to facts: Applying this framework, the Court held that the Department's contention that the concept of "change of opinion" was abolished post-1st April 1989 was untenable. The Assessing Officer's jurisdiction to reopen assessments must be based on "reason to believe" supported by tangible material, not mere change of opinion. Hence, the power to reassess remains circumscribed and cannot be exercised arbitrarily.

Treatment of competing arguments: The Department argued that the amendments empowered the Assessing Officer to reopen assessments on broader grounds, effectively removing the safeguard of "change of opinion". The Court rejected this, holding that the legislative history and the Circular demonstrate Parliament's clear intent to prevent arbitrary reassessments and preserve the "reason to believe" standard as a substantive check on Assessing Officer's powers.

Conclusions: The Court concluded that the concept of "change of opinion" has not been obliterated post-1st April 1989. The Assessing Officer's power to reopen assessments under Section 147 continues to require "reason to believe" based on tangible material, and mere change of opinion cannot justify reassessment.

3. SIGNIFICANT HOLDINGS

The Court held:

"We must also keep in mind the conceptual difference between power to review and power to re-assess. The Assessing Officer has no power to review; he has the power to re-assess. But re-assessment has to be based on fulfillment of certain pre-condition and if the concept of 'change of opinion' is removed, as contended on behalf of the Department, then, in the garb of re-opening the assessment, review would take place. One must treat the concept of 'change of opinion' as an in-built test to check abuse of power by the Assessing Officer."

"...after 1st April, 1989, Assessing Officer has power to re-open, provided there is 'tangible material' to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief."

"A number of representations were received against the omission of the words 'reason to believe' from Section 147 and their substitution by the 'opinion' of the Assessing Officer. It was pointed out that the meaning of the expression, 'reason to believe' had been explained in a number of court rulings in the past and was well settled and its omission from section 147 would give arbitrary powers to the Assessing Officer to reopen past assessments on mere change of opinion."

Core principles established include:

• The power to reopen income tax assessments under Section 147 is conditional upon the Assessing Officer having "reason to believe" supported by tangible material that income has escaped assessment.
• The concept of "change of opinion" alone does not constitute a valid ground for reopening assessments.
• The distinction between reassessment and review is fundamental; reassessment requires new material or information, whereas review is reconsideration of the same material, which the Assessing Officer is not empowered to do.
• Legislative intent as reflected in amendments and official Circulars confirms the necessity of objective grounds for reopening assessments to prevent arbitrary exercise of power.

Final determination on the issue was that the Department's appeals lacked merit and were dismissed, affirming that the concept of "change of opinion" remains a valid limitation on the Assessing Officer's power to reopen assessments under Section 147 post-1st April 1989.